If Crypto Belongs in Retirement Accounts, Where Are the Assets?

So far, there are only a handful of ways to invest in crypto via retirement accounts – most notably via a self-directed IRA. But fintech firms are making it drastically easier to open and fund a self-directed crypto IRA, and they’re turning their attention to financial advisors.

AccessTimeIconMar 3, 2022 at 1:50 p.m. UTC
Updated May 11, 2023 at 3:34 p.m. UTC
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There’s every reason to believe cryptocurrencies belong in retirement accounts – but why aren’t there more alternative investment options in retirement accounts in the first place?

Investors already have the ability to invest in cryptocurrencies in self-directed IRAs (SDIRA), but these accounts were once difficult propositions because they took a long time to set up. That’s changing thanks to new custodial offerings created, in part, because of the digital assets industry.

This article originally appeared in Crypto for Advisors, CoinDesk’s weekly newsletter defining crypto, digital assets and the future of finance. Sign up here to receive it in your inbox every Thursday.

“From investor to sponsor, it’s a cumbersome, painful process,” said James Jones, senior vice president of Investor Relations at CalTier Realty, a digital alternatives issuer with roots in private real estate. “The new SDIRA custodial platforms take a process that sometimes means weeks of paperwork going back and forth and turn it into a matter of minutes.”

Jones said alternative investment sponsors have long tried to tap the retirement account market. While at any given time $1 trillion resides in checking and savings accounts, $35 trillion resides in retirement accounts.

“People have $35 trillion sitting in retirement accounts, mostly over-allocated to stocks, bonds, mutual funds and ETFs,” Jones said, referring to exchange-traded funds. “Most people have the same portfolios in their taxable accounts as they do their 401(k). They’re going after 5% of the market and leaving 95% of the money on the table.”

Right now, the attraction of digital assets in retirement accounts is the potential for high-flying, tax-deferred growth. But over time, crypto will become more than just a growth play within these accounts.

Investors will demand more high-yield products, and the cryptocurrency and decentralized finance (DeFi) spaces could be instrumental in offering those opportunities within retirement accounts, said David Abner, global head of business development at Gemini.

A frustrating system

So why haven’t we seen more similarly esoteric assets –like private investments, real estate and collectibles – placed within a tax-advantaged retirement account? Because it’s exceedingly difficult to do so, said Eric Satz, the founder and CEO of AltoIRA, a digital self-directed IRA custodian that offers a crypto IRA.

“Alto really grew out of my own frustration with those legacy workflows and processes,” Satz said. “They resulted in higher-than-ought-to-be account fees and eliminated access for the majority of Americans.”

With crypto, it’s a case of mismatched-time – consumers wouldn’t want an account that took weeks to open and potentially weeks to fund to purchase a high-volatility asset, said Satz.

Legacy SDIRA custodians were also notorious for not updating their technology and workflows – and were ill-suited for an asset class that trades 24 hours a day, seven days a week.

“The legacy players have been around since ERISA [the Employee Retirement Income Security Act] was created in the 1970s,” Satz said. “They grew up with people, and paper-burdened processes and they never really updated their capabilities as new technologies developed.”

Jones said they rely on technology that isn’t integrated, creating complicated “go-between” processes involving the custodian and an exchange that was too much for many investors.

They were also costly to keep.

“Legacy self-directed IRAs typically charge account fees of $300 per asset per year,” Jones said. “If you have investments spread across a couple of platforms, you could be paying $3,000 to $4,000 in fees. If someone is only investing $15,000 to $30,000 a year, they’re seriously eroding their capital.”

Enter the crypto IRA

Today, there are options that make it easier to open and maintain a self-directed IRA capable of holding digital assets and other alternatives. A number of crypto IRA custodians, including Bitcoin IRA, Kingdom Trust, iTrustCapital and AltoIRA have launched accounts to hold digital assets.

One flavor of crypto IRA involves a custodian to hold the IRA, an exchange to manage cryptocurrency trades and potentially a secure storage solution offered by the bitcoin (BTC) IRA.

iTrustCapital earlier this year wrapped up a $125 million fundraising round that valued it at over $1.3 billion. Like AltoIRA, iTrustCapital uses Coinbase’s custody solution.

Generally, a crypto IRA provider will work with one exchange, but some are exchange agnostic. They also carry more fees than a standard free IRA at a traditional custodian, including set-up fees, trading fees and account management fees.

“We’ve eliminated most of the people and the paper in opening up a SDIRA,” Satz said. “You can open and fund an AltoIRA account depending on whether you have the information necessary sitting by your side in anywhere from 10-to-20 minutes as opposed to two-to-three weeks. That’s big-time savings.”

Moving funds into a crypto IRA ideally involves a trustee-to-trustee transfer, which moves the money from one custodian to the self-directed IRA custodian. Internal Revenue Service rules permit an unlimited number of trustee-to-trustee transfers in a given year.

The generic “60-day rollover” – taking funds out of one retirement account to deposit them within 60-days into another retirement account of the same type – requires the originating custodian to cut a check to the client and automatically withhold 20% in federal taxes. If the rollover amount is not deposited within 60 days, it becomes a fully taxable distribution from the retirement account subject to tax penalties.

Currently, the rules on such accounts require they be funded with earned income, so it is not possible to transfer digital assets from a taxable account into the self-directed IRA.

The future of 401(k)s?

Satz believes crypto 401(k)s and 403(b)s are in the making, enabling a cryptocurrency rollover from a workplace or solo retirement plan into an IRA, a view that Abner shares.

“We see advances in crypto IRAs,” Abner said. “You’ll be able to transfer a 401(k) into a crypto IRA for sure, so there’s going to be a lot of growth in that segment.”

Today, only a self-sponsored retirement account like a solo 401(k) or Simplified Employee Pension (SEP) IRA can be set up to hold crypto. True workplace plans may be more of an uphill battle because they are governed by the stringent fiduciary rules established by ERISA.

Currently, Satz said there are three ways advisors can use AltoIRA with their clients.

“One is that they can help them manage their own accounts by pointing them to Alto,” Satz said. “The second way is that advisors can view assets in separately managed accounts (SMA) via our partnership with Eaglebrook Advisors. The third way is that they can help clients invest in the leading cryptocurrency funds if that’s what their preference is, whether it’s Skybridge or Grayscale or Osprey, all of those funds are available on the Alto platform.” (Editor’s note: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.)

Satz said Alto is also offering an advisory option in the future.

“Alto is streamlined, integrated and launching soon with IRA as a service, which will allow for third-party account opening,” Jones said. “That is going to allow advisors to get on the platform and invest across the spectrum in their clients’ IRAs.”


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Christopher Robbins

Christopher Robbins is a nationally recognized journalist who has been featured as a speaker and panelist on topics including investing, personal finance and wealth management. He is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.

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